Freddie Mac was created in 1970 to promote an active national secondary market for conventional residential mortgages and has been issuing MBS since 1971. At the time of its creation, thrift institutions were the backbone of conventional home lending, and the intention of Congress was to improve liquidity for these institutions and to ensure the flow of funds from capital markets to them. As a consequence, Freddie Mac was governed as an entity within the Federal Home Loan Bank System, with stock held by member thrift institutions and the bulk of its loan purchases conducted among thrift institutions. However, the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) restructured Freddie Mac to give it a market-oriented corporate structure under the regulatory control of the Department of Housing and Urban Development (HUD).
Freddie Mac refers to its pass-throughs as "participation certificates" (PCs). Prior to June 1990, PCs generally were issued with "modified" guarantees, and they all had 44-day payment delays. A modified guarantee provides timely payment of interest and eventual payment of principal. These securities are now referred to as the "75-day-delay PCs" because payment is made on the forty-fifth day (plus the fact that mortgage payments are made 30 days in arrears to get 75 days).
In 1990, Freddie Mac announced the Gold program for fixed-rate mortgages,4 which shortened the delay to 44 days (standard 30-day delay on the underlying
mortgage payment plus a 14-day delay, payment made on the fifteenth day of the month), equivalent to the Ginnie Mae payment cycle. Also, Freddie Mac upgraded the guarantee. The Gold guarantee provides for timely payment of interest and scheduled principal and ultimate payment of all principal without offset or deduction. It stopped issuing the 75-day PCs and allowed holders to exchange outstanding 75-day PCs for Gold PCs without fee (although holders paid the difference in price owing to a 30-day shorter delay). Given conversions, as well as the passage of about 15 years and at least three massive prepayment waves since, only a small amount of the 75-day-delay securities remain outstanding.
At one time, within the 75-day-delay and Gold programs, Freddie Mac also distinguished between cash and guarantor programs. The earliest Freddie Mac PCs were created as "cash" pools. That is, Freddie Mac bought loans underwritten to its guidelines from originators at its "cash window" (now called the whole-loan desk) and issued PCs in $50 million minimum sizes. Like Fannie Mae (discussed below), it instituted a "guarantor" program in the early 1980s in which it guaranteed pools of loans underwritten to its guidelines that then could be sold by the lenders to broker-dealers. The actual transaction entails swapping the PC for the loans (hence they were also known as "swap" pools). This program quickly became popular with thrifts and mortgage bankers and grew to account for the bulk of Freddie Mac pass-through production. Freddie Mac dropped the distinction between cash and guarantor pools in 1994; today, pools backed by loans purchased by the whole loan desk are identified by the seller field in pool information transmitted by the agency to broker-dealers, third-party data vendors, and other market participants.
Pooling criteria for Gold PCs have evolved over the years. Currently, the interest rates on the underlying mortgages may range between the PC coupon plus any minimum required servicing fee (25 basis points currently) and 250 basis points above the PC coupon. Loans may be of any age.
The dominant PC sectors are 30-year and 15-year standard conventional level-pay loans on single-family (one- to four-family) dwellings. Fifteen-year mortgages are pooled separately from 30-year mortgages. Ten-year mortgages may be pooled separately or with 15-year mortgages; 20-year mortgages may be pooled separately or with 30-year mortgages. Balloon mortgages, modifiable mortgages, interest-only (IO) mortgages, prepayment penalty, and FHA/VA mortgages are pooled separately. Finally, although they may be pooled separately, up to 10% of the conventional mortgages in a standard PC pool (by original principal balance) may be cooperative-share, buydown, or relocation mortgages so long as the combination of these types does not exceed 15% of the original principal balance. Separately pooled loan types are indicated by pool prefixes; the broad array of prefixes is modified periodically by discontinuation and additions. (The PC Prefix Guide on www.freddiemac.com lists 24 categories of Gold PCs and 27 of ARM PCs.)
The minimum pool size for fixed-rate Gold PCs is generally $1 million. Freddie Mac also allows investors to combine pools of the same type and coupon in Giant PCs. The minimum pool size for a pool backing Giant PCs is $1 million.
The agency's Web site, www.freddiemae.com, is an excellent source of additional information on its pass-through programs, including current offering circulars (similar to prospectuses), current lists of frequently used pool prefixes, and so forth.
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